What to Know for First-Time Credit Card Users

Published on Dec 24, 2013 06:00 am

For first-time users, a credit card can seem almost magical. Without any money in your pocket you can buy almost anything you want, and you don’t have to pay for it for at least a month. Some cards even throw in additional freebies. Unfortunately, irresponsible use of credit can lead to big problems down the road. Even responsible users who regularly pay off their debt can encounter unpleasant surprises.

Understanding Credit Limits

Most credit cards come with credit limits set by the issuer. If you exceed your limit, your creditor may report this to the credit agencies. That notation will stay on your credit report for seven years and is likely to affect your credit score. With a lower credit score, it can be harder – and more expensive – to get additional credit such as a home mortgage or a car loan in the future. Even using up a significant percentage of your credit limit can hurt your score, since part of your credit score calculation is based on the percentage of your available credit you are using. The higher your credit utilization, the greater the effects on your credit score.

How Credit Card Interest Rates Work

Credit cards offer the flexibility to pay off your bill every month or to pay over time. There can be a significant cost to the latter option, however. Credit cards charge interest on the amount that you don’t pay off in full, and that interest compounds over time. The interest charge added to your account every month may not seem like a large amount, but it can add up rapidly, and turns a reasonable purchase into an overpriced one.

Credit Card Fees

In addition to interest, some credit cards charge a fee just for the privilege of having the card – typically called an “Annual Fee”. If you don’t pay the fee when it hits, it gets added to your balance and interest is assessed on it, just like on the rest of your purchases. If you’re late on a payment, don’t pay at least the minimum amount due, or have a payment returned, you’re likely to trigger additional fees, along with a higher interest rate.

Benefits of Credit Cards

While credit cards have the potential to get you into financial hot water, they carry numerous benefits. Many cards offer to pay you cash back for a certain percentage of your purchases, typically one to two percent but sometimes as high as five percent. Branded cards offer benefits associated with a particular institution, often an airline or a hotel partner.

For example, you might earn air miles towards a free flight, or hotel points good for a free night in a hotel. Many cards offer additional bonus points for dining, traveling or shopping in an online mall, and some offer large sign-up bonuses. Since frequent card applications can affect your credit score, researching the bonus options most appropriate to your lifestyle can help narrow down the number of cards you apply for.

About the Author
John Csiszar began writing in 1989 and his work appears in various online publications, including The Huffington Post. Csiszar earned a B.A. in English from UCLA and served 18 years as an investment adviser and certified financial planner.

This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.